March payroll employment was disappointing, although economic gains cannot be expected to move in a smooth ascending growth curve. Economic trends remain solid. There is little reason to expect monetary policy to change as yet, although the latest figures reinforce the Fed's concern that job growth is insufficient to reduce unemployment as much and as quickly as they would prefer. So, there's every reason to expect policy to remain highly accommodative. A few months ago, this employment report would have been taken as good news. That it is now disappointing is a good measure of how far we've come.
Equity markets declined last week, catching their breath after a major ascent, while concerns over Europe's finances were given renewed life by a poor auction in Spain. Such setbacks are likely to continue. Europe is in recession, so progress in reducing government budget deficits will be slow, at least until some sort of economic recovery, even a weak one, is in place. Add in upcoming elections and a random public protest now and then and it is doubtful bad news out of Europe will remain off the front pages.
Earnings reports will begin this week and gains are likely, reflecting solid growth in the first quarter. GDP Q1 growth is expected to be soft, but job growth was quite solid and it is doubtful firms would be hiring if sales were disappointingly weak. Unemployment claims continue to decline, while the composition of the hiring looks better. Fewer people are working part time involuntarily. There is some modest hiring in the construction sector. And job losses have slowed for government workers. So, all the trends seem desirable, even if the pace of job growth may still be somewhat irregular.
Investors remain very cautious. It takes very little for Treasury bonds to rally and interest rates remain quite low. Some analysts suggest this is only because of substantial buying of longer-term bonds by the Fed, but private capital flows still favor bonds overwhelmingly compared to stocks. So, companies continue to take advantage of these favorable market conditions by issuing bonds at a record pace to repurchase their own shares, if they are not paying off maturing debt. Stock prices should work their way higher over the course of the year, as long as growth continues, which seems by far the most likely path for the economy. Now we turn to the Q1 earnings report, beginning this week.